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The positive run for stocks continued in August as the major market indexes regularly reached all-time highs. While investors remained bullish toward equities, it wasn’t always clear why.

Although the economy is gradually picking up steam, it has a ways to go to reach its pre-pandemic level. Gross domestic product for the second quarter showed that the economy receded at an annual rate of 31.7%. Job growth is ongoing, yet more than 14 million people are receiving unemployment benefits.

Personal income inched ahead by 0.4%, but consumer spending rose by 1.9%. Inflation remained well below the Federal Reserve’s target of 2.0%, keeping prices for consumer goods and services down. Interest rates for loans and mortgages remain low helping the housing sector to surge.

did you know?

The S&P 500 is a capitalization-weighted index, not equally weighted. Market capitalization is derived by the number of shares multiplied by price, giving the edge to large stocks. For example, Google’s (Alphabet Inc.) market cap is close to 1 trillion now compare that to Delta with a market cap of $21B. Delta’s piece of the S&P is overpowered by Google and other tech stocks, even though it’s a big part of the economy, affects American’s lives and livelihoods and is a mainstay in the news.

As of August 2020:

  • FAAMNG (Facebook, Amazon, Apple, Microsoft, Netflix, and Google) makes up 23% of the total index
  • Apple and Microsoft makes up 5% of the entire index—a bigger allocation than the energy, real estate and utility sectors.
  • The smallest 250 stocks in the S&P 500 only represent a mere 12% of the entire index
  • The concentration is even more skewed in the Russell 1000 with 37% comprised of the mega-cap tech stocks

Source: Yahoo Finance

bright ideas

If the economy is in quicksand, why has the S&P 500 traded at all-time highs in 2020? This may be a question you are hearing if your clients look to the S&P as a benchmark. The answer: they are comparing their performance to an index completely disconnected to the U.S. economy and the everyday realities for the average investor. According to Beacon’s Dan Baccarini, “The S&P doesn’t represent anything meaningful to the average investor. And it’s for two reasons: One is the composition of the S&P, and number two is the disconnect with the S&P and the economy.”

1) The overweight composition of the S&P 500: 1% of the stocks in the S&P 500 represents more than 20% of the total allocation.

If you gave your clients five stocks to bet their entire retirement savings on, they would think you were crazy. Did we mention those five stocks are also in the same industry? That’s exactly what’s happening in the S&P 500. While the index tracks the top 500 stocks, as of August 20201, 27% of the S&P is in the technology sector, with only five companies making up 23% of the total index. This is the highest overweight concentration in a handful of companies we have seen in market history. As we saw in the early 2000s and 2008, it is this type of overweight concentration that leads to market bubbles with devastating bursts.

Add to that, over half2 of the tech stocks’ revenue is derived from overseas. For example, 31% of Google’s revenue comes from the EMEA region and 17% from the APAC region. A downturn in any one of these economies will have far-reaching consequences on the tech sector.

2) The disconnect of the S&P 500 with the economy: The S&P 500 continues to trade at all-time highs, despite arguably the worst U.S. economic collapse since the Great Depression.

In addition to being overweight in the top five companies within the tech sector, the composition of the S&P 500 doesn’t reflect the entire economy. Of the 500 companies, about 450 of them are doing terribly in 2020! Entire critical sectors that affect everyday life are being largely ignored. For example, the consumer discretionary sector, which is made up of luxury goods, apparel, travel, restaurants, vehicles, lodging, and department stores, represents 64 companies (excluding Amazon,) but only makes up 6% of the total index value as of the end of July3. Department stores are down 62.6%, airlines off 55%, oil and gas equipment is down 50.5%. United Airlinescut its workforce by 25% with revenue down 87% from last year. This represents a real struggle for America, but it doesn’t put a dent in the performance of the S&P 500 because airlines contribute only 0.18% to the index!

COVID S&P 500 Impact

Educating clients on the pitfalls of the S&P 500

With the S&P 500 holding more than its share of attention in the headlines, it’s important to educate your clients on all of these pitfalls and considerations. For those investors who might think that these mega-tech stocks are “safe” due to their massive scale, remind them of how these bubbles can change in an instant, and that only one of the companies that was in the top five in 2000 still is on top today—Microsoft.

For additional ideas or recommendations on timely client conversations, feel free to contact your wholesaler or visit our Advisor Toolbox for a number of great resources explaining our equal sector allocation philosophy.

1 Yahoo Finance:
2 Statista:
3 Bloomberg:
4 NPR:

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Miss this week’s Advisor Symposium? Access all of the resources now:

Investors’ Concerns and Expectations Vanguard
Elevating The Client Experience TD Ameritrade

Link to Webinar Replay

Note the above presentations were created for our advisors with the goal of helping to provide additional resources, tools and talking points that can be used to help navigate clients through this unprecedented time. As such, these presentations are for advisor use only and should not be shared with clients. Be sure to visit Beacon’s News & Press page for the latest credibility pieces to share with your clients and prospects, and follow Beacon on LinkedIn for the latest updates as they happen.

Be sure to visit Beacon’s News & Press page for the latest credibility pieces to share with your clients and prospects, and follow Beacon on LinkedIn for the latest updates as they happen.


Follow Beacon on LinkedIn

For Advisor Use Only, Not to Be Used With Clients

The GIPS Compliant Presentations for our Vantage portfolios can be obtained by clicking on the link below.  If you would like the Compliant Presentations to be emailed directly via PDF file or if you would like to receive a copy of Beacon’s Composite Descriptions; please respond to this email or contact Beacon at 937-439-9093.

BCM 2018 Compliant Presentations

Beacon Capital Management, Inc. is a registered investment adviser with the Securities and Exchange Commission. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

Additional information about Beacon Capital Management is also available on the SEC’s website at under CRD number 120641. Beacon Capital Management only transacts business in states where it is properly registered, notice filed, or excluded or exempted from registration or notice filing requirements.

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Beacon Capital Management

7777 Washington Village Drive, Suite 280, Dayton, OH 45459

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